Workers' Compensation Insurance

Last Updated: 5/9/2024
Workers' compensation is a form of insurance that protects a business owner from claims by employees who experience a work-related injury or illness-either sustained on business premises or due to business operations. Typically, workers' compensation covers the employee's medical expenses, rehabilitation costs and at least some portion of their lost wages. If an employee is killed on the job it also pays a funeral benefit.

In 1911, the first workers' compensation law to withstand constitutional challenges was passed in Washington State. Workers' compensation coverage is mandatory for most employers in every state except for Texas. Rather than mandating participation in the workers compensation system, Texas allows employers to "opt-in" to providing coverage for employees. Employers who choose not to participate still must provide protection to employees injured in the course of employment or face litigation. In most states mutual and stock insurance companies compete to write workers' compensation coverage. In a few jurisdictions (North Dakota, Ohio, Puerto Rico, U.S. Virgin Islands, Washington, Wyoming) coverage is provided by a monopolistic state fund. Most states allow large, financially stable companies to "self-insure" their workers' compensation exposure if they can meet rigorous qualification standards.

Workers' compensation insurance evolved as a compromise between labor and management. Injured employees agree that in exchange for state mandated medical, disability income, rehabilitation and/or death payments, they will not be allowed to sue their employers. The workers' compensation system serves as the injured employee's "exclusive remedy" for workplace injuries. Employers agree that they will not invoke the traditional legal defenses of contributory negligence and/or assumption of risk. Injured workers receive timely medical care and disability payments, and employers are not involved in time consuming and expensive legal defense actions. (Note: Employers in Texas that elect to "opt-out" of purchasing workers' compensation coverage can be sued and retain their traditional legal defenses.)

Workers' compensation benefits are reviewed and voted on by state legislatures each year. The state department of labor has the responsibility of administering benefits for injured workers. In the case of severe injury, judges at the department of labor make rulings on the extent of disability and the amounts that insurance companies are required to pay injured workers.

Workers' compensation rates are evaluated annually by insurance companies and advisory organizations such as the National Council on Compensation Insurance (NCCI). These organizations publish loss costs which member companies can use in their rate filing activities. Workers' compensation rates are subject to the same rate filing rules the states apply to all property/casualty filings.

The workers' compensation system has successfully operated for over 100 years. With careful regulatory review it will continue to benefit injured workers and employers well into the future.

The Workers' Compensation (C) Task Force is charged with studying the nature and effectiveness of state approaches to workers' compensation and related issues, including but not limited to assigned risk plans, safety in the workplace, treatment of investment income in rating, occupational disease, cost containment, and the relevance of adopted NAIC model laws pertaining to workers' compensation.  In 2021 the Task Force will continue discussing issues regarding advisory organizations, rating organizations, statistical agents and insurance companies in the workers’ compensation arena; monitoring the movement of business from the standard markets to the assigned risk pools; following workers' compensation issues regarding cannabis in coordination with the Cannabis Insurance (C) Working Group and discussing workers’ compensation issues related to COVID-19. 

In July 2020, the Task Force adopted a NAIC white paper, Workers' Compensation Policy and the Changing Workplace.  The paper explores how changes in work and the evolving landscape of legal employment are shifting responsibility for coverage and benefits for occupational injuries, illnesses, and fatalities.